EU-India Investment Facilitation Desk

Transcription

1 EU-India Investment Facilitation Desk India European Union Under the EU-India Trade & Investment Development Programme A Joint Programme of the European Commission Delegation and Ministry of Commerce, Government of India Sector Brief IT & ITES industry in India

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3 Disclaimer This Brief is prepared by EU-India Investment Facilitation Desks (IFDs) to provide a broad sector overview of the above sector in India. This Brief may not be reproduced, wholly or partly in any material form, or modified, without prior approval from IFDs. It may please be noted that this report is for guidance information purposes only. It is based on secondary research and is not intended as a comprehensive or exhaustive study, but merely as a background sector guide. Though due care has been taken to ensure the accuracy of the information to the best of the IFDs knowledge and belief, it is strongly recommended that the readers should seek specific professional advice before making any decisions. Please note that the IFDs do not take any responsibility for the contents of the Brief nor for the outcome of decisions taken as a result of relying on the content of this report. The IFDs cannot be held liable The IFDs do not recommend or endorse any of the enterprises, geographic regions / locations, products and services, etc mentioned in this report. Neither IFDs nor PricewaterhouseCoopers shall in any way, be liable for any direct or indirect damages that may arise due to any act or omission on the part of the Reader or User due to any reliance placed or guidance taken from any portion of this publication. 2

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5 1 Industry Overview Major Power-house of the Indian Economy IT-ITES has emerged as one of the fastest growing sectors in the country. These sectors have been key to the growth of the tertiary sector of the Indian economy and have been contributing significantly to the growth of the country s GDP. It would not be wrong to say that these sectors, directly and indirectly, have been one of the major drivers behind the consistent 8% GDP growth that the country has been able to achieve over the last 3 years. Some of the key features of the IT-ITES sectors in India are as below: Growing Revenues - IT-ITES sector revenues in the financial year (FY) 2006 was estimated at around USD 37 billion (approximately 29.3 billion Euros) - The revenues have grown at a CAGR of 30% between FY 2004 and FY The contribution of the sector to the country s GDP have gone up from 2% in 2000 to 5% in 2006 Booming Exports - Exports currently contribute almost 65% of IT-ITES sector revenues in India - The exports have nearly doubled in the last three years and stood at around USD 24 billion (approximately 19 billion Euros) in FY Exports have grown at a CAGR of around 35% between FY 2004 and FY Large Domestic Market - The domestic market has been estimated at around USD 13 billion (approximately 10.3 billion Euros) in FY This market has also been growing rapidly over the last few years. Between 2004 and 2006, it has grown at a CAGR of around 22% Source: National Association of Software and Service Companies (NASSCOM) 1

6 The Indian IT-ITES market has a wide range of players. The following Table 1 presents a snapshot of the various types of players in the Indian market. Table 1 Category No. of players Tier I 3-4 Tier II 7-10 Offshore operations of Global IT majors Share of export revenue 45% of IT Services 4-5% of BPO 25% of IT Services 4-5% of BPO 10-15% of IT Services 10-15% of BPO Pure play BPO % of BPO Captive BPO % of BPO Emerging players > % of IT Services 5% of BPO Revenue Performance > than USD 1 billion USD 100 million-usd 1 billion USD 10 million-usd 500 million USD 10 million-usd 200 million (Excl. leader - USD 500 million) USD 25 million-usd 150 million (top 10 units) < USD 100 million (IT) < USD 10 million (BPO) Source: NASSCOM & IBEF Segments of the IT industry in India Key Market Segments The IT and ITES industry comprises of the following three major segments: IT services ITES industry Hardware industry 2

7 Figure 1 IT&ITES IT Services ITES Hardware Embedded software Marketing & Transaction Processing PCs, Laptops and Client server Functional Domains HR / Payroll processing Accounts processing Hardware Industrial, care, in Health Control Sectoral Domains Health care, Medical, Image processing Banking, financial services research Engineering services, R&D New Areas: Knowledge & Legal Process Outsourcing -- IT Services Sector IT services segment comprises of software development and related services. Currently in India, the different types of software being produced can be classified under the broad heads: customised software for clients; embedded software and application software. 3

8 IT Services Sector Revenues Billion Euros FY 2004 FY 2005 FY 2006 IT Services Exports Domestic Source: NASSCOM The key trends which emerge include This segment has grown at around 30% over the last 3 years Exports have been the major impetus to growth in this area. The domestic market contributes only around one-fourth of the revenues, while exports contribute almost three-fourths According to various studies, the future outlook for this sector is very bright. Market reports have projected the IT Services segment to maintain a similar growth rate and almost double its revenues over the next three years. IT-Enabled Services (ITES) sector ITES industry is another important segment of the Indian software industry. The ITES segment consists of various sub-markets. It includes the following segments Marketing & Transaction Processing Outbound Sales HR / Payroll processing Finance and Accounts processing Health care, Medical, Image processing Banking & Financial services research 4

9 Engineering services, Research & Development Other than the above mentioned areas where the IT-enabled processes (mainly Business Process) are being outsourced, there are a few emerging areas within the industry where India is increasingly becoming a stronger. Knowledge Process Outsourcing (KPO) is one such area which is gradually becoming a key sub-segment of ITES in India. Some companies are currently looking at outsourcing some legal processes to India as well. Most of the global companies that source these services from India, either source it through their joint venture partners or through the wholly owned subsidiaries that they have set up. Standard Chartered Bank, World Bank, HSBC are a few examples of the wholly owned subsidiaries. In the case of the Deutsche Bank it has entered into a joint-venture partnership with the HCL for certain services. Citibank has entered into a partnership with the Polaris through Eserve for servicing of the banking operations. These are a few examples of the different paths followed by international companies sourcing their ITES requirements. Figure ITES Sector Revenues Billion Euros FY 2004 FY 2005 FY 2006 ITES / BPO Exports Domestic Source: NASSCOM Please Note: Revenues from R&D services are also included in IT-Enabled Services Revenues The key features in this sector are: Relatively young sector in India less than a decade old Contributes over 30% of the IT-ITES revenue of the country Revenues have almost doubled over the last three years growing at a CAGR of around 35% 5

10 Of the total 9.5 billion Euros of revenues in 2006, the process outsourcing revenues were around 5.7 billion Euros, while R&D services, and others yielded revenues worth 3.8 billion Euros Export comprises the major chunk of the revenues. The domestic revenues have also been on the rise This tremendous export-led growth is likely to continue as currently only about 10% of the global BPO market potential (estimated at around US$ billion) is being tapped Hardware Industry The Hardware industry is emerging stronger with the expansion in the allied sectors like the ITES and software industry. Figure Hardware Sector Revenues Billion Euros FY 2004 FY 2005 FY 2006 Source: NASSCOM 6

11 Geographical Spread The industry is fairly well-spread across the country with the areas in darker shade having a greater concentration. The main centres/ cities are also marked on the map. Source: IBEF The exports in the last two years from the major states in which the IT-ITES industry is located in the country is shown below. The graph shows the software exports as registered by units registered with the Software Technology Parks of India (STPIs) the actual exports are therefore higher than depicted. Karnataka, Maharashtra, Tamil Nadu and Andhra Pradesh occupy the top 4 positions in the ranking by the value of exports in

12 Million Euros Karnataka Maharashtra Tamil Nadu Andhra Pradesh Haryana Uttar Pradesh Delhi West Bengal Source: STPI FY FY Destination of Indian IT-ITES Exports The Americas (mainly USA) is the single largest customer for the Indian IT-ITES industry providing over two-thirds of India s export revenues in this sector. Europe is the second largest customer contributing to 23% of Indian IT-ITES exports. Figure Key Export Destinations Europe 23% Others 1% Australasia 8% Americas 68% Source: NASSCOM Domestic IT-ITES market - all set to boom The Indian domestic market for IT-ITES has been growing at a very healthy 22% CAGR over the last 3 years. Domestic spending on software and services have grown at a rate of 27% CAGR during the same period. Some of the large Indian corporates have already started outsourcing some processes. Some of them are outsourcing their entire IT activities. 8

13 According to market reports, India will be the fastest growing markets in terms of IT spend in the Asia-Pacific. The key segments in the domestic IT market are: Banking and financial services Small home office Manufacturing Government IT and Telecom The following chart shows the contribution of these segments in the revenues of the domestic IT-ITES industry in the country. Figure Domestic IT Market: Key verticals Domestic IT Market: Key Vertical Markets Others, 23% B FSI, 24% Small office/home, 14% M anufacturing, 10% Government, 13% IT/Telecom, 17% Source: NASSCOM * BFSI = Banking and Financial Services 9

14 2 India Advantage India has several advantages and strengths which potential investors could consider. These include: Regulatory support Infrastructure support labour market advantage Advantage India Regulation Infrastructure Labour Market Advantage Copyright Act Patent Act 2001 Tax Concessions Subsidized infrastructure IT ACT STPI* Semi conductor Act SEZ* IIIC* *STPI Software Technology Parks of India; SEZ-Special Economic Zones; IIC-Industry Institute Interaction Centres. Regulatory support The government of India adopts different strategies to support the IT industry in the country. There are different legislations that govern the information technology industries in India. They are: IT Act Semiconductor Act Patent Act Copy right Act IT Act The IT Act in India covers various aspects such as Digital Signature, Electronic Governance, Attribution, Acknowledgement And Dispatch Of Electronic Records, Secure Electronic Records And Secure Digital Signatures, Regulation Of Certifying Authorities, Digital 10

15 Signature Certificates, Duties Of Subscribers, Penalties And Adjudication, The Cyber Regulations Appellate Tribunal and the Offences Semiconductor Act 2001 This act has provisions for creating Registrar of Semiconductor Integrated Circuits Layout- Design. It also facilitates the creation of an appellate body. It has been created to comply with the WTO norms relating to the commercialization of the semi conductor and integrated circuits design. Indian Patent Law India has one of the oldest patent laws. These have been constantly updated and amended to make them TRIPS compliant. In the post Doha scenario, Indian government has taken sincere efforts in actively facilitating patent registration. Further due to the phenomenal growth in the knowledge economy, voluntary compliance has increased in India. There are 5 offices for the controller of patents and these offices assist innovators, corporates, etc in the search and the registration of the patents. The patent law is critical for the semi conductor design and research. Indian Copyright Act The Indian copyright act is also one of the oldest acts in the country. It has been renewed modified and amended in the year 2001 along with the Patent Act. The software prorgramme is covered under this act. This Act also covers "Computer Programme" in "Literary Works". Copyright Infringement. As per the provision in Indian Copyright Act, 1957 and as amended in 1994 / 95, any person who knowingly makes use on a computer of an infringing copy of computer programme shall be punishable with imprisonment for a term which shall not be less than 7 days but which may exceed to 3 years and with fine which shall not be less than 877 Euros (which may extend to 3058 euros. Infrastructure support The Indian government provides various types of infrastructure support for IT and ITES companies. These include setting up of: Software Technology parks of India Special Economic Zones (SEZs) Institutional Incubation Centres (IICs) Software Technology Parks of India (STPI) Software Technology Parks of India (STPI) is an autonomous organization under Ministry of Communications and Information Technology, Govt. of India established in 1991 The mandate for STPI is to promote export of IT software and services in the region by providing: Single Window Clearance to Software exporting units Fiscal benefits 11

16 Infrastructure support (Data communications and Incubation) Interface between Govt. and Industry. Investors may refer to the STPI website Special Economic Zones A policy was introduced in the year 2000 for setting up of Special Economic Zones in the country with a view to provide an internationally competitive and hassle free environment for exports. Units may be set up in SEZ for manufacture of goods and rendering of services. All the import/export operations of the SEZ units will be on self-certification basis. The units in the Zone have to be a net foreign exchange earner but they shall not be subjected to any pre-determined value addition or minimum export performance requirements. Sales in the Domestic Tariff Area by SEZ units shall be subject to payment of full Custom Duty and import policy in force. Further Offshore banking units may be set up in the SEZs. The policy provides for setting up of SEZs in the public, private, joint sector or by State Governments. It was also envisaged that some of the existing Export Processing Zones would be converted into Special Economic Zones. Accordingly, the Government has converted Export Processing Zones located at Kandla and Surat (Gujarat), Cochin (Kerala), Santa Cruz (Mumbai-Maharashtra), Falta (West Bengal), Madras (Tamil Nadu), Visakhapatnam (Andhra Pradesh) and Noida (Uttar Pradesh) into a Special Economic Zones. In addition, 3 new Special Economic Zones approved for establishment at Indore (Madhya Pradesh), Manikanchan Salt Lake (Kolkata) and Jaipur have since commended operations. In addition, several more approval have been given for setting up of Special Economic Zones in various parts of the country in the private/joint sectors or by the State Government. More details on SEZs are available on Incubation Centres All the IITs, IIMs and the public universities in India have incubation centres which can allocate or fund incubation centers. These would be lowest cost infrastructure with access to the educational institutions. Details of these incubation centers are available in the respective university / IIT / IIM websites. Many international corporations have established partnership with University professors for the creation and sustenance of the output from enterprises in these units. Other links relating to the incubation centers are provided in the appendix. 12

17 Manpower Scenario in India Indian manpower skill availability is very conducive for the growth of the software industry. There are formal and informal streams of educations that make the IT and the ITES industry thrive in India. Table 1 Indian IT Skilled Manpower Availability: IT Software and Services No of engineering graduates Degree (four years) Diploma & MCA (three years) *No of IT professional s Engineering IT graduates (degree) Engineering IT graduates (diploma) F F F 316, , , , , , , , , , , , , , , , , , , ,000 84, , , , ,000 95,000 99, , , ,000 * IT professionals include Comp Science, Electronic and Telecom professionals Table 1 describes the abundance of the labour supply in India. Every year close to one hundred thousand IT professionals are being created in India. The table also gives the outlook for the increase in the number of professionals in India. Table 2 Competitiveness in terms of Skilled Manpower Cost in India (Euros) India China Skilled workers Technicians Assistant / Junior Managers Senior / General Managers Source: Source: Visteon, USA and Wage cost comparisons of ILO report 2004, SIPCOT Table 2 indicates competitiveness of the Indian labour market and the and hence the international players are entering this emerging market. With this background the IT industry in India and its segments are analyzed from the trade and investment perspective. 13

18 3 Opportunities Attractive Investment Destination With the huge advantages that the IT-ITES sector in India provides and the huge potential that it holds, various players have shown / are showing keen interest in the sector. Foreign direct investment (FDI) in the sector has grown by leaps and bounds. In 2003, FDI in the sector amounted to Rs 5.4 billion. This figure increased to Rs 31 billion in 2004 and further to Rs 42 billion in 2005 increasing almost eight times in 3 years. The sector has also been able to generate great private equity participation interest. According to IBEF and Indiastat, in the sector witnessed the greatest number of deals in India. There were 33 deals worth Rs 19.9 billion which took place in the last year. India is home to some of the biggest names in the IT-ITES industry players across the globe. Some of the major players are: Table: Major IT & ITeS Companies in India Revenues 1 millions of Euros Domestic Private Companies Tata Consultancy Services 2715** Wipro Technologies 2284** Infosys Technologies 2011** HCL 838* International Private Companies GE * IBM * Dell 59674* Microsoft 44672* IT ITES 1 Global Revenues Consolidated Source: Capitaline, Fortune * ; **

19 Key Opportunities The IT-ITES sector in India provides a host of opportunities in all its segments. As has been mentioned earlier, the current segments which have been in focus have huge potentials to be tapped. Some new opportunity areas are also emerging which have great business potential. Some of these areas include: Legal process outsourcing - - believed to be the next biggest opportunity area after business and knowledge process outsourcing - according to The Economist, the worldwide spending on legal services amounts to about US$ 250 billion per annum of which the US accounts for almost twothirds - currently only a miniscule proportion is outsourced, but this can be a major opportunity in future Animation and gaming software development - According to NASSCOM estimates, the Indian market for animation development is likely to be about US$ 1 billion while the gaming segment is likely to be around US$ 300 million by 2009 Medical Patient diagnosis Remote networking support IT Audit 15

20 4 Reference resources Ministry of Information Technology and Communications ( National Association of Software and Services Companies ( Software technology Parks of India: Special Economic Zones (SEZs) Ministry of Small scale industries Incubation centers 16